In recent months, the Toronto real estate market has continued its stratospheric rise both in the volume of real estate traded and in the setting of precedent prices. In the current environment, how do you determine whether you should rent or buy real estate, especially if this purchase marks your first-time entry into the market? Before making your first purchase, you should ask yourself a few questions to determine whether home ownership in the current environment is an appropriate fit.
What is your motivation behind your property purchase? A generation or two ago, the objective of purchasing real estate was to find a place to put down roots for the long term with the additional benefit of building equity. But then things changed. Real estate began morphing into an investment vehicle that just happened to have the added benefit of an ever-changing address to lay your head. For shrewd opportunists, masters of timing, and property ladder vagabonds, this real estate boom has built a great number of fortunes. Truthfully, slow and steady wins the race, and a healthy gain of 4 percent to 6 percent a year is more sustainable, keeping the asset value just beyond inflation.
What does this mean? There are many variables which impact your ability to make money in real estate. If you’re looking for a sure-fire profit, the key is to choose property which can serve your needs for the long term. Because even in strong markets, timing is everything and you may not break even if you sell too soon. If your objective is to truly make a profit in real estate, be cognizant of all the ancillary expenses associated with property ownership. Accept that it takes time to recover these costs.
Are you rushing to purchase because you think you’re throwing your money away on rent? All buyers believe home ownership is better than just paying rent. But the truth of the matter is, for the first few years most of your monthly mortgage payment is paying the interest cost associated with borrowing the money, rather than going towards paying the actual debt. You’ll see that it requires several years of mortgage payments to build a solid equity position. Until that happens, those mortgage payments are pretty much on par with rent.
Have you reconciled that the investment of ownership is more expensive than renting? Because it is. A lot of prospective buyers figure they’ll translate whatever their monthly rent is into the equivalent of a mortgage payment, knowing that there will be some additional expenses to cover. But they often don’t fully account for what and how much these additional property expenses will be. With a freehold house you’ll likely have bills for gas, hydro, water/sewage/garbage, property insurance and property tax. Plus you need to be prepared for repair and maintenance expenses. If you buy a condominium you’ll have a monthly common fee, but don’t assume that the fee will cover all the building expenses, as special assessments over and above the monthly common fee are not uncommon. Buying a property still takes money even if you manage to keep your mortgage payments low and save on closing costs.
What else are you invested in? Home ownership is about shelter, yes- but be aware of the place that the investment component plays in your overall portfolio. What else are you invested in, and how liquid is the rest of your portfolio? How subject are you to market corrections, or movements in interest rates? Although many think of their property as a separate asset from their stocks and bonds, it is actually part of the greater whole, and requires examination in that context.
Have you crunched the numbers to get a clear picture of owning versus renting? If you’re weighing the pros and cons of buying, you might find it useful to take the pulse of the local rental market for a couple of reasons. Analysts believe if the cost of owning is significantly higher than renting a similar property, it indicates the housing market may be overvalued relative to its economic fundamentals. The point is, you want to ensure you’re making a prudent and profitable purchase, keeping in mind not all properties escalate in value the same, as some offer better opportunities over others.
Ask yourself…are you ready to commit? At the end of the day the answer to the question “Should I buy real estate?” isn’t going to show up on a spreadsheet or be revealed by a survey of friends and family. Emotionally, you need to be ready to commit, and able to accept being tied to one place for an extended period of time. Owning a property is a huge emotional and financial commitment. Ultimately you’ll know when the time is right for you. As the saying goes: “You want to own the property. You don’t want the property to own you.”
Do you have questions? Seeking the answers to these questions can be a challenge- especially for first timers, and it makes sense to align yourself with someone you can trust to help navigate the market.
At urbaneer.com we’re here to help, all without pressure or hassle. We simply love what we do. With a multi-disciplinary education in housing, sound knowledge of the mechanics of real estate and a sharp skillset in evaluating properties for over two decades, we’re here to guide you through all the factors which play into establishing the value of any property.
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